Back in 2009, I finished my MBA work with a Strategic Management course, which ended the year with a Case Competition. The target company was PetSmart, and my team came up with some great recommendations, creative and effective ways to create competitive advantage and grow the company at little cost. My report earned 99% from the professor, and his critiques of our presentation rehearsals praised us and gave us high hopes to win. But when the actual competition happened, a couple members of my team froze and we failed to place in the top three slots. Besides some presentation anxiety by my team, we made the mistake of not carefully considering our audience. We had prepared for our professor and designed our presentation as if we were actually going before the board at PetSmart with our recommendations. What we had not considered was that some of the judges were students from prior years who had won the competition. These judges, to our surprise, did not stick to the criteria outlined in the competition profile, and none of the judges were previously briefed on PetSmart’s corporate strategy and goals published in their 2008 annual report. In the lunch following the competition, I discovered that the judges did not even realize that some of the recommendations from winning teams contradicted PetSmart’s actual stated objectives and priorities. Many of the judges made decisions based in large part on style rather than substance, and this cost us in the competition. The lesson I took from that experience reminded me that many decisions are based on emotion rather than reason, and anyone hoping to sell their position effectively must consider their audience and prepare their argument for the people they have the best chance to persuade. The current crisis with the debt ceiling, therefore, will have short-term and long-term winners and losers, in significant part due to how well each side understands its audience.
The decision basically comes down to four groups; unrealistic liberals who imagine they can continue to spend without consequences (a minority of the democrats but visceral in emotion and support), Tea Partiers who refuse to accept any increase in the debt limit or increase in government ‘revenues’ for any reason, democrats who want more tax increases than spending cuts, and republicans who demand spending cuts must be significantly greater than any increase in money the government collects. The people outside those four groups are neither large nor organized enough to play much role in the debate or decision. The decision therefore comes down to the following questions:
- Is it necessary to raise the debt ceiling?
- Is it realistic to address the debt with just spending cuts?
- What solution do voters want?
- What will the voters absolutely not accept?
- What spending cuts are acceptable?
- What ‘revenue’ increases will voters accept?
First, the ceiling. As much as I hate to say it, the debt ceiling in this case does need to be raised. The problem is that the Congress waited so long to address the problem that we don’t have the time or slack to figure out a solution before we blow through that limit. Refusing to raise the debt ceiling at this time is in the same class of decision as slamming on the brakes when the car starts to skid, a panic response which generally leads to bigger problems.
Next, the cut-only approach. In theory, we should be able to fix the problem by just cutting back on spending. The problem is that we have three classes of spending that can’t easily be reduced; essential needs, entitlements, and the interest on our existing debt. Cutting the first would be suicidal, cutting the second will be hard to get passed into law, and the third is simply not possible. We also have to face the fact that republicans control only the House of Representatives, while the democrats control the Senate and White House. Anything passed into law will have to get support from democrats, enough to compel the President to sign it. That does not mean we just accept whatever the democrats demand, but it does mean we have to accept the reality of our limits as well as our power.
Third and fourth are the questions of what voters want and won’t accept. As much as we like to imagine that America is full of people who think the same way we do, in truth that’s just not so. There are regional, cultural, and social considerations which have to be considered, including the way Congress’ actions will be received by the public. Obama is lying when he claims most of America wants tax hikes, but it is true that most voters believe that some kind of tax increase will be necessary, and many believe those increases can be implemented by making some other group of people pay the increase; on the Left there is the broad belief that a lot of “rich” people are not paying enough, while on the Right there is a broad belief that some people who don’t have to pay income tax should be forced to do so now. There has been no specific poll taken which shows popular support for a tax increase that would affect the specific people polled.
Just about everyone not named ‘Obama’ understands that the main problem is spending, and that serious cuts need to be made. When two and a half trillion dollars a year is not enough to pay for what you are buying, you have a problem no matter who you are. The trick is to figure out what gets cut. Democrats demand defense cuts, and to be sure there may be programs to reduce or abolish there, but that’s hardly the first place to cut. Republicans want Obamacare repealed, which would certainly reduce a lot of costs, but would be impossible to get through the Senate or signed by President Obama. Ultimately, this is the main hurdle for negotiations; everyone knows cuts need to be made, but no one can agree on specifics. What will probably happen in the end, is a general reduction in department budgets, and everyone will have to make do with less. It’s not the wisest course, but given the time constraint, it may be the only one which can go into effect in time.
The next point brings us back to revenue. President Obama does not like to be clear about raising taxes, but let’s be very blunt – if you bring more money into government, you have to do it by raising taxes. Someone is paying more, no matter what you call the action. And since taxation is inherently parasitic in nature, any increase in taxes – no matter who pays – will damage the economy at a time when this would have serious repercussions. Voters have figured this out, which is one reason the 2010 election turned out as it did, and this recognition is why Senate Majority Leader Reid backed off tax hikes in his own plan presented this week. While we must be careful to watch what happens in the next several months, as the temptation to slip in taxes, fees and rate increases will be very strong, for the moment it appears that Congress at least understands that cuts must be the primary focus, and the secondary focus as well.
Let’s look at that debt, for an understanding of the situation. The debt, as of March 31, stood at $14.825 trillion, an obscenely large number no matter how it’s presented. $3.7 trillion was held in General government long-term notes, with another $3.6 trillion in ‘Other sector’ long-term bonds and notes. This is actually good news, as it means just about half the debt is held in bonds and notes that will come due over a long period of time, with only about $365 billion coming due each year in principal.
Another $1.7 trillion dollars was held in currency and deposits in banks, with another $583 billion in currency and deposits in other sectors and monetary authorities. That’s money being used in circulation, and while it’s a good idea to reduce that amount a bit once the economy gets going again, for now we can take the news that this money is not ‘coming due’ in the sense that we normally apply to debt.
Money Market instruments account for another $884 billion, which means some liability, but like long-term bonds the payments due are not generally immediate. Even ‘short term’ debts won’t all come due in August. Another $2.5 trillion is held in loans, which also are repaid over time. All in all, the debt situation is difficult but manageable, provided the government simply gets spending under control.
Here’s a more detailed look at where the money has gone. In simple terms, the Federal Reserve is telling us that our debt is held by a lot of creditors, some overseas, but for the most part the money we owe is to ourselves. That does not mean it does not have to be paid, and paid on time, of course. We have obligations to fund essential services, and the whole concept of bonds and loans depends on confidence that the loans will be paid according to the contracted terms. And the weight of the debt total is simply too big, and cannot be sustained indefinitely. And as wiser observers have noted, if the U.S. gets into trouble, there is simply no one available to bail us out. The Congress has to find a practical solution, and set things in motion in the next five days.
Which brings us back to the audience. Whatever is finally done to address the debt problem, the public will make their opinion known rather quickly, and it is therefore essential for republicans and democrats, both, to understand the perspective of people to whom they are listening, and with whom they should be talking. Listening to radio and reading blogs, I have observed that the avowed Tea Party members have promised fierce primary opposition to “anyone” who supports the Boehner plan, simply because even if it passes it would not be a complete and total victory. Leaving aside the obvious fact that anything that would completely please the Tea Party Clique would have absolutely no chance of passing the democrat-controlled Senate, or getting the signature of President Obama, I would also note that Allen West and Paul Ryan support the Boehner plan. Not because it is perfect, but because it is the best plan available with a realistic chance of passing through the Congress. To put it plainly, anyone calling themselves conservative who would attack Allen West and Paul Ryan, is representative neither of conservative values or intellectual maturity, and should not be taken seriously by the people making important decisions. Similarly, the people still obsessed with class warfare and tax hikes to fix the government’s spending crisis should be ignored by anyone trying to find viable solutions or read the public will. What most people want and demand is simply a reasonable approach to the problem and a serious attempt to cut down on spending. Scare tactics have no place in the debate, nor do ultimatums by politicians or special interest groups. Three hundred million Americans are going to be affected by the decision and resolve of the Congress, so it’s high time the Congress address the broad majority who are simply demanding Congress and the President stop making threats and speeches, and put together a solution, starting by voting on the plans already available.